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Finding the value hotspots in Europe

With the strong economic recovery in continental Europe, investor interest has followed suit and demand has been strong for core assets in well-connected locations. Value has therefore, on the whole, become harder to find in Europe. However, there are still opportunities to find long-term value in select markets, especially in CBD and edge of CBD office markets where rental growth is strengthening, based on current pricing, says David Jackson, Fund Manager, at M&G Real Estate.

Investor confidence in continental European real estate makes perfect sense when taking into account the strong macro backdrop, with attractive GDP growth and falling unemployment. Throughout 2017, economic growth in the Eurozone consistently beat expectations. Following growth of 0.7% in Q3 and 0.6% in Q4, Eurozone GDP reached 2.5% in 2017 overall, well above the ECB’s forecast of 1.7% at the start of the year. This marks the fastest pace of growth since 2007. The European Commission’s sentiment indicator also reached 116 in 2017, the strongest result since 2000 when the Euro was first introduced.

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With the built environment responsible for almost 40% of energy consumption in the EU,1 real estate investors around the world are increasingly committing to more sustainable practices. Our study evidences that a portfolio of certified buildings experiences relatively higher operating expenses, but can also generate higher rental income and higher cash flows for distribution to investors.

As growth in the European economy continues to broaden out across the region, we anticipate growing demand from institutional investors to not only secure attractive income in a low-yield environment, but to protect the real value of those returns over the long term. Inflation linked assets that may help cushion returns against interest rate rises continue to attract investor interest, helping secure protection against changes in the economic climate.

Economic growth in the Eurozone has softened in 2018 with trade uncertainties, but a number of macro tailwinds should support steady momentum going forward. GDP grew in Q1 and Q2 by 0.4% and 0.3% respectively, down from the 0.7% quarter-on-quarter growth seen over the second half of 2017.

The start of 2018 saw a slowdown in the UK economy, with real GDP growing by only 0.2% over the first quarter. The arrival of the so-called “Beast from the East” storm in March, bringing construction to a standstill and deterring consumers from hitting the shops, contributed in part to this lacklustre expansion.